MC Investigation: Zerodha, Angel One, Motilal among brokers in ties with illegal advisors

Brokerages Zerodha, Angel One, MOFSL and Upstox refused to comment when contacted.

Even as fake invest gurus are getting called out openly, leading brokerages including Zerodha, Angel One, Motilal Oswal Financial Services Ltd. and Upstox continue to have partnerships with finfluencers. These finfluencers recommend stocks, bring in new investors to drive trade volumes, without having the necessary registration and in violation of norms laid down by the Securities and Exchange Board of India (Sebi).

Brokerages Zerodha, Angel One, MOFSL and Upstox refused to comment when contacted, but one of them said on condition of anonymity, that partnering with such finfluencers is in a regulatory “gray” area and that they will wait for clarification from Sebi before they decide on these partnerships.

Moneycontrol found at least four different partner finfluencers, who have lakhs of followers (and one even with millions of followers), who discuss stock ideas with the disclaimer that they are not Sebi-registered investment advisors or research analysts and that the content is only for educational purposes. But legal experts told Moneycontrol that only registered advisors are allowed to discuss stock ideas and said that “educational purposes” is not a valid disclaimer.

Also read: MC Investigates: In low-volatility market, illegal renting out of prop accounts goes a step further

The brokerages’ association/partnership with the finfluencers come in varying forms, but all are an extension of a referral programme. That is, these influencers direct clients to these broking firms through links given in their content and earn a percentage of the broking fee. They discuss stock ideas to get more views and market insiders said  the brokerages cast a blind eye to these violations because they benefit indirectly from the client additions.

The brokerage mentioned earlier said that they see an explicit recommendation of ‘buy’ and ‘sell’ by an unregistered advisor as a violation without discussing the merits of a stock.

“A ‘buy’ or ‘sell’ recommendation is not necessary for advice to be considered investment advice,” said Sandeep Parekh, founder of Finsec Law Advisors and former ED and Head of the Legal Affairs and Enforcement Department at Sebi.

Investment-advice-giving entities are regulated through the SEBI (Investment Advisers) Regulations and the SEBI (Research Analysts) Regulations. The first is for those who want to give personalised advice to individuals and the second is for those who want to give advice to a larger audience, like subscribers of a research firm. Finfluencers, who address a large audience, would ideally need RA registration to discuss stock ideas.

Under the RA Regulations, “making a buy/sell/hold recommendation” is only part of the RA definition. Under the IA Regulations, investment advice means “advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning” and IA includes any person who holds themselves out as an investment adviser, “by whatever name called”.

Going by these definitions, Parekh said, “It is illegal for a person who is not a Sebi-registered advisor or analyst to be discussing a specific security and brokerages, which are regulated entities, should not be associated with them.”

He added, “However, brokerages will not face any liability (as the law stands) the finfluencer is the one who will be found in violation of the regulations.”

In a press conference held on June 28, the Sebi Chairperson, Madhabi Puri Buch, addressed some of the concerns around finfluencers and said that there is a consultation paper in the works. Though she did not get into the details of the paper, she said that there will be two elements that will definitely be part of it—one “very important” aspect would be that regulated entities such as brokers, exchanges and mutual funds will not be allowed to associate in any way, whether it is through advertising, profit-sharing or referral fee, with unregistered entities.

“We believe that if you are a regulated entity, then your partners or associates will need to be regulated… you cannot advertise on channels of unregulated entities, you cannot give them a referral fee and you cannot give your link (account opening link) on their channels,” she said.

Secondly, the paper will tackle inducements offered to people to encourage them to trade.

“If you are genuinely teaching someone, we have no problem with that… in fact, it is good because even we want investor awareness and investor education. However, if you are giving inducements such as promising lakhs or crores in returns through trading… then it will be considered fraudulent and misleading (and will not be allowed),” she added.

While that consultation paper is still in the works, the regulator has been penalising unregistered entities that sell stock tips via Telegram channels or WhatsApp, finding them in violation of IA Regulations. The most recent order seems to be one issued on July 31 against Restock Research owned by Raj Kumar Kshwah, and a widely discussed settlement order was issued on May 25 with respect to Mansun Consultancy and its directors, P R Sundar and Mangayarkarasi Sundar.

On June 14, 2023, the regulator passed an interim, ex-parte order against Kabir Financial Services, Sayyed Shujauddin and Farhat Perween for selling unregistered investment advice to nearly 1.4 lakh subscribers of their Telegram channels. The order stated, “turning a blind eye to unqualified and unregulated investment advisory services can cause irreparable damage to the integrity of securities market. Such services may adversely impact the orderly development of securities market apart from hurting the interests of the investors in the market.”

Usually, the regulator penalises such entities by restricting their participation in the securities market for a specified period or until further orders and by ordering for the proceeds from the advisory services to be impounded, directing the entities to not dispose of or alienate any assets until the impounded amount has been deposited in an escrow account.

Rachana Ranade, a Chartered Accountant who has more than 4 million subscribers for her YouTube channel and who hosts referral links for both Zerodha and Upstox, has videos discussing stock ideas with titles such as ‘Top 2 Stocks On My Radar’ and `Fundamentally Strong Stock’ under various prices. Ranade is not registered as an IA or an RA, going by the Sebi list. Questions sent to her team have not been answered, and this article will be updated once their responses come in.

Ranade does not explicitly give ‘buy’ or ‘sell’ calls in these videos but discusses the merits of a stock.

Sonam Chandwani, Managing Partner at KS Legal and Associates, said that this can still be construed as investment advice and can work against the interest of investors.

By giving advice as unregistered entities, the finfluencers will not be subject to the oversight and regulations that govern professional investment advisers, according to Chandwani. “This could potentially lead to conflicts of interest, misinformation, or other issues that the regulations are designed to prevent,” she added.

In an earlier article, Moneycontrol had exposed the dangers investors could be exposed to from stock recommendations from unregistered advisors. One risk is being a victim of pump-and-dump scams. Registered analysts and advisors are required to get their trades audited and to make details of their trades available to the regulator when asked. This is so that the analysts or advisors do not profit from suggesting a stock and taking an opposing position on it — suggesting subscribers/followers buy and stocking up on the security before making that recommendation, for example.

Also read: MC Investigates: The two big, illegal reasons why finfluencers don't want to be SEBI-registered RAs

Ranade is reportedly an authorised partner of Zerodha, though there is no official confirmation on this. An authorised partner functions like a sub-broker, that is, they earn a percentage of the brokerage fee they funnel into the platform. But unlike sub-brokers, they are not required to resolve issues clients face when interacting with a platform.

Not all brokerages partner with finfluencers this way. Instead of signing finfluencers on as authorised partners, some brokerages assign referral codes to these content creators, to identify the set of clients that these creators bring in. Here too, the brokerages share a portion of the fee earned through these clients with the finfluencers.

Take for example, Rahul Jain. He has over 1.16 lakh subscribers for his YouTube channel, which carries videos titled `3 Best Public Sector Banking Stock’ and `The Best Mid Cap Banking Stock’ among others, and which has referral links to open accounts brokerages including Angel One.

Under the mid-cap banking stock video, the description reads, “I present you the best mid cap banking stock under 100 right now… This little gem could soon become the best banking stock in coming years and may become best large cap banking stock in the years to come.” It goes on to add the usual disclaimer that this should be taken as educational content.

When Moneycontrol tried to open an account through the link given for the brokerage, it came with a referral code (RINRA). Though the box to enter the code has an “optional” qualifier, Moneycontrol found that this referral code could not be removed when advancing to the next page.

Share Vidya, which has a referral link to MOFSL, has over 53,000 subscribers for its YouTube channel. In it, anchors analyse stocks and the positives of initial public offers (IPOs). When Moneycontrol tried to open an account with MOFSL using the referral link, again it came with a referral code that could not be removed.

A person who was offered such a partnership with leading brokerages told Moneycontrol that a finfluencer can hope to earn in lakhs per month with this. According to him, brokerages may even offer up to 80 percent of the brokerage fee earned to the finfluencer because these tie-ups can bring that kind of traffic onto these platforms.